Vodafone (LSE: VOD) shares fell 5% in early trading Tuesday, on the back of full-year results.
Headline figures were disappointing. But the big news is that new chief executive Margherita Della Valle is set to shake things up.
In her opening statement she said: “Today I am announcing my plans for Vodafone. Our performance has not been good enough. To consistently deliver, Vodafone must change.”
Time for change
I’ve wanted to see that for years. Vodafone has huge debt, yet pays big dividends. And that’s with cover by earnings chronically weak, often non-existent.
Investors like the cash handouts. But I think they helped destroy shareholder value, and I see it in the share price. Vodafone shares have lost more than half their value in the past five years.
It’s been a tough time for telecoms in general. But the Vodafone fall is around twice that of rival BT Group, and BT has big debts too.
Weak sales
Total revenue for 2022-23 rose just 0.3%. Service revenue did a bit better, up 2.2%.
But adjusted basic earnings per share (EPS) dropped a couple of percent, and adjusted free cash flow fell 11%. The dividend remains the same at 9c per share, for a yield close to 9%.
Net debt fell by nearly 20%, and I rate that as good news. But it still stood at €33.4bn (£29bn). That’s more than Vodafone’s entire market-cap of £24.5bn.
Valuation
On key measures, Vodafone shares look like good value. Forecasts put the price-to-earnings (P/E) ratio at around 12 to 14 over the next few years, which seems quite cheap. But that takes no note of debt.
Adjust for debt, and it pushes the effective P/E up as high as 26 to 30. For a stock paying 8% per year, that could still be cheap. But only if earnings and cash flow can grow, and sustain the dividends.
Former boss Nick Read, who stepped down in December, had plans to reduce costs. I think he took too long to get to it though. So what will the new boss do?
Hard measures
Della Valle said: “My priorities are customers, simplicity and growth. We will simplify our organisation, cutting out complexity to regain our competitiveness.“
In part, that means job cuts, with 11,000 to go in the next three years.
So is it time to buy Vodafone shares now? As I write, the price has come back a bit, 3% down on the day. After these weak results, that seems mild. Might we have a hint of upbeat sentiment emerging?
Balance sheet
I didn’t see a lot about fixing the balance sheet in this update, and that’s still my main fear. I would have liked to hear more about debt.
I’d love to see dividends tied to earnings too, which just has to be better in the long term. But a cut in that big yield could cause a share price dip in the short term. Still, maybe earnings can improve first.
It’s early days, but I think the future for Vodafone shares might just have got a bit better.
